Will the Bank of England cut interest rates?

Evidence is mounting that the Bank of England will cut interest rates by quarter of a percent tomorrow. Read on to find out more about how this could affect you.

Figures released today by two of the UK's top lenders have revealed a sharp downturn in two of the biggest drivers of economic growth, house prices and consumer confidence.

Many analysts are predicting that the Bank of England will cut its base rate from 5.75% to 5.5% in a bid to boost the faltering economy. This marks a dramatic turnaround from September, when interest rates were expected to rise to 6%.

However, the global credit crunch caused the Bank of England to hold rates and 5.75% and now a decrease could be on the cards.

Today, mortgage lender Halifax revealed that house prices fell 1.1% in November. This brings house price growth for the year to 6.3%, down from 8.9% in October. House price growth could well slip below the 5% mark for the year as higher lending costs take their toll, though a drop in interest rates could help halt the slide.

This is the first time since 1995 that the lender has reported a fall in house prices for three consecutive months. Meanwhile, another lender, Nationwide, has said that November's slide was the biggest drop in house prices in 12 years.

There is little doubt that demand is slowing significantly. The Bank of England has reported that home buyers took out 88,000 new mortgages in October, down 12% from September and down 31% from a year earlier.

While a fall in house prices alone would be unlikely to prompt the Bank's Monetary Policy Committee to cut rates, evidence of a slump in consumer confidence could mean a drop in interest rates is imminent.

Figures released by Nationwide today reveal that consumer confidence slid 12 points to 86 in November, the biggest slide in three years. Shoppers have tightened their purses in the past three months amid the economic uncertainty caused by the US sub-prime mortgage crisis. And as the extent of the fallout from the crisis has yet to become clear, consumer confidence is unlikely to recover of its own accord any time soon.

While there has been some uncertainty over consumer spending for some time, these latest figures will put the Bank of England under increased pressure to cut rates on Thursday.

So what does all of this mean for you? If you are a homeowner a cut in interest rates is good news. If you have a variable rate mortgage, or any variable rate loan, your monthly repayments will drop. A cut in interest rates may also spark renewed demand for homes, which would help arrest the current house price slump.

On the other hand, if you money put away in savings accounts you wills see a decrease in your returns. However, with the recent turmoil in the stock markets it probably remains the safest place to put your money.

In truth, a drop in interest rates is looking increasingly likely, with the possibility of more to follow next year. Already today the Bank of Canada cut its interest rates for the first time in more than three years, and more countries are likely to follow suit.